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THE 1031 Exchange Rule
A property transaction qualifies for a deferred tax exchange only if it follows the 1031 exchange rule in the US tax code and the treasury regulations. The properties in the transaction must be “Like Kind” and both must be held for a productive purpose.
The 1031 exchange rule also lays down a guideline for the proceeds of the sale. The proceeds from the sale absolutely must go through a "qualified intermediary" (QI) or else all the proceeds will become taxable. The entire cash or monetary proceeds from the original sale has to be reinvested towards acquiring the new real estate property. Any cash proceeds retained from the sale are taxable.
The second rule is that the 1031 exchange requires that the replacement property must be subject to an equal or greater level of debt than the property sold or as a result the buyer will be forced to pay the tax on the amount of decrease. If not he/she will have to put in additional cash to offset the low debt amount on the newly acquired property.
1031 Exchange Timelines:
The Identification Period: This is the period during which the party selling a property must identify other replacement properties that he/she proposes to buy. . This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday.
The Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. This is the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal (US) holiday.
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